National Credit Act

Private Property South Africa
John Loos

John Loos of FNB Property Finance looks at the potential impact on the residential property market of the National Credit Act.

The National Credit Act (NCA) has got the tongues in the residential property

market wagging, and in some quarters, has caused some alarm.

It is too early to quantify the "damage" done by the Act, but the reports

emanating from household-related lenders do indicate a significant impact. It is

important not to over-react, however, as much of the impact may be temporary in

nature due to "teething problems" related to the change in the way that lenders

are forced to do business.

Firstly, let's accept that there has probably been a significant slowdown in

mortgage loan approvals during June. But what still needs to be determined is

the various factors causing the slowdown.

One should assume that the administrative process required by the NCA has become

more cumbersome, and therefore perhaps longer in many instances. This effect

would be a "once off", and would rectify itself in the monthly volumes after a

few months once the delay has become a "permanent feature" of the mortgage

application and approval process.

Another factor would be clients having yet to fully adapt to new requirements

placed on them in terms of information required regarding their financial

situation. In cases where clients get turned away due to insufficient

information, it could often merely be a case of "back to the drawing board" for

many, before returning later with the required information. In such cases the

negative impact on property transaction volumes need also not be permanent.

Then there is the case of mortgage loan applicants whose applications get

rejected due to the affordability calculation indicating that they do not have

the capacity to repay their debt. This is the crux of the NCA, as it aims to

prevent so-called "reckless lending". Some alarmists seem to imply that such

applicants who do not qualify for the loan for which they apply are lost to the

residential property market forever. This is not necessarily the case. Many of

the applicants will merely have to moderate their expectations, look for a more

affordable house, and apply for a smaller mortgage loan. Others would be able to

go home, re-prioritise their finances, reduce certain other non-property

expenditure items (similar to what many of us do subsequent to taking on more

debt except that the NCA may now require them to do it in advance of increased

borrowing), and come back some months later in a better financial state to

qualify for the desired mortgage loan.

In addition, when applicants are turned away, they may choose to re-prioritise

their debt too. Here, I believe that residential property has a potential

advantage over other forms of shorter term debt. A house is an asset, besides

being a necessary item for the average middle class household, and is seen by

many as more of an investment than many consumer goods which are purchased on

credit. When faced with the need to re-prioritise debt, many households could

try to dispense with some less essential forms of short term debt first. I

believe, therefore, that mortgage debt has a possible advantage over other forms

of credit due to the popularity (and perceived necessity) of owning residential


This choice in favour of residential property-related debt may further be

enhanced by the fact that mortgage debt is repaid over a longer term than, for

instance, credit card debt, and normally has a lower interest rate. This makes

the monthly repayments more affordable, and it would thus make some sense, where

affordability of debt-repayment becomes an issue, to rather cut back on the

short term forms of credit.

Even the household that falls badly short of the new NCA credit requirements is

not necessarily lost to the residential property market. That household could go

for the rental option, more affordable in the short term than credit buying in

many areas because of the low yields that currently exist. This would be an

additional boost for rental demand, which in turn would ultimately provide

additional support for the buy-to-let market.

Therefore, while there are currently many concerns regarding the impact of the

NCA, and many uncertainties too, I would suggest that much of the apparent

impact that we currently experience will be temporary, and will be watered down

over time as both lenders and borrowers adjust to a new way of doing business.

In addition to all of this, it may be difficult to separate the impact of the

NCA on the market from all the other negatives currently present, including

another interest rate hike in June along with deeds office disruptions due to

June civil service strike actions.

That there will be some form of impact I would not dispute, but I do not expect

it to be severe. Let me sum up the anticipated impacts below:

  • No impact on the main trends currently experienced in the residential market.

We know that the residential market has been on a slowing trend (in terms of

house price inflation), and that trend is expected to continue into next year

before turning for the better. The end of aggressive interest rate reduction

after 2003 started this broad slowdown as from late-2004, and more recently the

interest rate hikes have sustained this. The NCA may perhaps just exacerbate the

weakening trend a little in the near term.

  • There has been a relative shift in activity towards the lower end of the

residential market, with more affordable areas outperforming the more

illustrious areas in terms of price inflation. Once again, the NCA will probably

add to this trend, as certain borrowers have to moderate their expectations,

take on smaller value loans than previously applied for, and go for more

affordable areas.

  • As mentioned, the NCA may lead to some additional rental demand from those

people who were turned away at the bank but who desire to sustain the living

standard aspired to. Again, though, this won't lead to a trend change, as

Trafalgar has already reported the beginnings of a rental market recovery from


  • From the additional support for the rental market, flows the belief that there

could be additional support for the buy-to-let market. This market has been

weakening for some time. My expectation has been that it will turn for the

better at some stage in 2008 on the back of further significant recovery in the

rental market. The NCA may just help to bring the recovery of the buy-to-let

market forward from when it otherwise may have been, due to a rental market

growing at a slightly faster pace than otherwise would have been the case.

All in all, therefore, I do not expect any major trend changes in residential

property as a result of the NCA, merely some slight re-enforcement of current

trends in the short term. My gut feel, too, is that many of the problems

recorded are more "teething problems", and as such temporary. Admittedly only

time will tell.In addition, if the NCA is going to be successful in eliminating reckless

lending and promoting more responsible lending, this will be to the long term

benefit of the residential property market, promoting sustainability in

performance. There has been much written regarding the dubious activities of

lenders in the ailing US sub-prime residential market. Healthy and responsible

lending practices are a positive for residential property performance in the

long term, not a negative.

Having said this, though, my feeling is that on average, lending practices in

SA have not been reckless. The household debt-service ratio for the country as a

whole is still not at historic highs, and while certain household-related bad

debts have risen with the interest rate cycle in recent times, the banks are not

experiencing a crisis. This would suggest that the adjustments that lenders

(there are always some reckless ones but I'm referring to the group as a whole)

need to make to curb reckless lending and get in line with the NCA are not

extreme and as such the impact should be limited once the new modus operandi has

been established.

Therefore, I expect that in a year's time or so, we'll look back on the NCA

implementation as a minor "irritation", and the residential property market will

be doing just fine. Because at the end of the day, when the Clinton Democrats

used to roll out their campaign slogan "It's the Economy Stupid", they could

just as well have been referring to what is by far the biggest driving force of

the South African property market. At around 5% per annum real economic growth,

the important long term property fundamentals still look solid.

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